ING’s Francesco Pesole argues that even under a severe and prolonged Gulf conflict, European gas prices are unlikely to revisit 2022 extremes, supporting a constructive medium-term view on EUR/USD. However, he warns that near-term downside risks remain around central bank meetings and Gulf headlines, with EUR/USD potentially dipping below 1.1450 before recovering later in the year.

Gas constraints support Euro fair value

"We have published a new set of energy price scenarios and their implications for rates and EUR/USD. In our baseline, intensive combat ends within two weeks, but lower‑intensity strikes could continue for several months, delaying the reopening of the Strait of Hormuz, which would not return to full capacity before June. This means a $91/b average for Brent in 2Q and $85/b in 3Q, in our estimates."

"A key point of our new scenario analysis is that gas prices are likely to remain elevated only in a severe and prolonged conflict. Even in that case, a return above 100 EUR/MWh in TTF looks to be off the cards, and 2022 swings would still dwarf those caused by this Gulf conflict."

"This conviction call continues to form the backbone of our upbeat view on EUR/USD into year-end, as capped gas prices mean a smaller impact on the eurozone terms of trade and, by extension, the euro’s medium-term fair value."

"In the near term, downside risks persist, and EUR/USD recovery on Monday may have short legs unless some headlines on ceasefire talks or NATO coordination on securing Hormuz start to appear."

"The sum of Fed and ECB meetings today returns a downside balance of risks for EUR/USD this week, in our view, and we could see the pair re-exploring sub-1.1450 before recovering, barring positive developments in the Gulf."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)